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Are UAE banks broke?

Are UAE banks broke?

Despite government bailouts, tight liquidity persists throughout the Emirates.

May 7, 2010 10:18 by



Though certain loans have yet to be classified as non-performing, many are not being repaid. The sensational stories of cars left at the airport hide a slightly less exciting issue – if those cars were bought with loans, no one is making repayments.

If the banks are as highly leveraged as their customers and people stop making loan payments, the institutions become cash constrained. In what could to be an effort to force banks into transparency, the central bank does not appear to be making any more loans just yet, even though liquidity remains tight. And the banks that are publicly traded have another consideration: fearful shareholders who have already lost confidence in the local market may be further deterred by more losses.

Both Abu Dhabi and Dubai based banks had significant exposure to Dubai World. The IMF estimates that half of Dubai World’s interests lay in Nakheel and Limitless World, which focused on overseas real estate investment. When global demand for real estate fell off in 2008, cash stopped going into the highly leveraged companies.

The IMF says that UAE domestic credit growth from 2004 to 2008 was some of the fastest in emerging markets. But over the same period, liabilities owed to foreign banks doubled as a ratio of GDP.

Dubai World played a major role in the economic health of the emirate’s economy. As part of the “Dubai, Inc.” network of commercial companies and investments either owned by or associated with the Dubai ruling family or the government, it received considerable support. The heavy investment in the oversaturated local real estate market, often through debt financing, put the companies in a precarious position. Dubai World largely used short-term debt to finance the mega-projects. When it announced the standstill on loan repayment in November, it effectively froze the local economy. In the boom, some banks had loan-to-deposit ratios over 100 percent, meaning that banks were overstretched – they’d lent out more cash than they had in assets.

The central bank gets its funds from the other emirates, including cash-rich Abu Dhabi. Any requirements on the parts of the banks can still be met by the central Bank’s current reserves. Money from Abu Dhabi came to Dubai’s rescue when the central bank fully subscribed to $20 billion bond from the government of Dubai.

The S&P report predicts a slowdown in retail lending (citing expatriate layoffs in the real estate and financial services industries, and that non-performing loan ratios should peak by midyear 2010. The country remains wealthy though, and a recent report from Booz & Co. says that resource rich Gulf countries will recover faster than the rest of the world.



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3 Comments

  1. Anupama V. Chand on May 10, 2010 2:55 pm

    As I see it, there are two problems that the UAE is going to have to primarily handle. I would like to clarify at the outset that I am no financial whiz nor indeed any kind of economic analyst, and would not dare to presume such a position. However, as a lay person who has been a resident of this country over the last 15 years on and off, I have to say that transparency of the country’s financial institutions has become its biggest Achilles heel when it comes to attracting long-term foreign investment, and detracting long-term debtors from bolting into the blue, causing millions of dirhams to disappear, which could in any country with legitimate and transparent financial rules have been retrieved through bankruptcy procedures.
    Most international investors with very systemic procedures would hesitate before investing in such a country, let us be realistic in examining our flaws here. It is also a bit of a catch 22 trying to be transparent in the UAE, where the tradition of declaring things upfront has never really been valued. One must certainly not live in the delusion that there is no wealth in the UAE, or that the country as a whole is facing a liquidity crisis, that would be too premature. Abu Dhabi is considered to be one of the wealthiest cities in the Arab world, with hitherto undisclosed reserves of wealth, which if push came to shove, it could certainly help Dubai out with. Dubai for its part would need to overhaul its banking, insurance and financial systems and procedures, so that it is not just a question of showing transparency and convincing the world at large, but making it credible enough for residents, citizens and any average man-on-the-street to know that his money is saving. This in times of recession, when the Emirate is exposed to international markets that are reeling under a fresh wave of shake-ups is going to be the biggest challenge. The international media has not given Dubai an easy time of it either, trying to knock it down in its beleagured state, and deliver the final blow….Dubai has recovered much better than expected, however much needs to be done to bring back the vibrancy that existed. Time perhaps to take stock and re-evaluate.

     
  2. Baker on May 11, 2010 9:32 am

    Delaying paying contractors and/or consultants by government or semi government entities has been endemic in this area for as long as I have been there (35 plus years). Often on the flimthiest of excuses.
    Now of course we have the mother of all excuses: the world economic situation.
    What is conveniently ignored is that many of these mega projects should never have been awarded in the first place because their finance to enable completion was not properly arranged.
    That being said, I sincerely hope all will be sorted out somehow and soon because it is still a great place.

     
  3. Miss Anne Thropic on May 11, 2010 10:30 am

    If I was a bank, I’d be very wary about loaning anyone any money right now, whether it’s a big company or an individual. So many projects in Dubai were built on credit and won’t be completed any time soon. That had to stop, as does the rampant offering of higher and higher credit limits on cards for personal customers. Encouraging debit card usage instead of harassing customers with irresponsible credit card offers would be a step in the right direction too.

     

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